Are Debt Funds Suitable for your Investment Portfolio?

Yesterday when I shared my portfolio, one of my friends asked me the above question that are debt funds suitable for your Investment portfolio. I know why he asked this question, whenever we talk about Mutual Fund people think of getting around 10 to 15% interest to create wealth for the future. In order to get the higher returns, we need to take higher risks and thus also the probability of taking higher losses when the market gets down.

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Now if we have a goal which is around 10 years or 15 years this small amount of dip is ok, but what if we have a goal in a couple of years thus getting this type of dip is not good for our goal and thus we have to be cautious on what asset allocation we are keeping. This is where the debt funds come into the picture where debt funds are of low risk as well as gives fewer returns whereas it gives that cushion for your portfolio which we want when the market dips like this.

The debt funds have less volatility and thus its NAV value does not change much and mostly it goes up even though it's not given that much interest. Along with that debt, funds have mostly lower risk and thus for any emergency if we have to take out that money, it is much easier as it will not be like that we have to sell it at a lower price. But the only problem investors are not very keen on investing in the debt funds is that it gives lower returns and thus investors have to do that tradeoff i.e. low risk and low return.

Now the real question is are debt funds suitable for your investment portfolio.

Every individual has different financial goals, some are for the short term, medium-term or some are for the long term but the problem is if the asset allocation is not done well or if there is an emergency, your investment portfolio should be something like that where if you withdraw some amount then also your goals should not be hampered. Or if the market dips, you are ok to stay invested for some more time.

I have been keeping my mutual fund portfolio with 70% Equity and 30% Debt and when the market goes up or down I can rebalance it to keep that asset allocation in check and I guess this gives me the extra freedom so that if there is too much market crash I can convert my debt money to equity and thus be more prepared for the future. Similarly if the market have a good bull run, I can convert my equity to debt and thus have that profit booking in check.

Debt funds provide lower returns but actually, it is good to get a stable income and are risk-averse than the equity funds. It is the best choice if your goal is in short term. So in conclusion whatever your end goal is, a debt fund is a good alternative for investors to keep that balance in their portfolio.

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